What is the Purpose of the Employee Retention Credit?
In 2020, the US Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act to provide economic relief to business owners and individuals affected by the Covid-19 pandemic. As part of this package, a refundable tax credit was created: the employee retention credit (ERC). This article will explain what the ERC is and why it's important for businesses in the current environment.
What is the Employee Retention Credit?
The employee retention credit is a refundable tax credit designed to help businesses retain their employees during periods of decreased revenue due to COVID-19. The credit is 40% of eligible wages up to $6,000 per employee, per year. To qualify for the credit, businesses must have seen at least a 50% drop in quarterly revenues as compared to the same quarter in 2019. Eligible wages are those paid between March 13th, 2020 and December 31st, 2020.
Who Can Claim the Employee Retention Credit?
The employee retention credit is available to both employers who are subject to the payroll tax and employers who are not subject to payroll taxes. Eligible employers include corporations, partnerships, non-profits, sole proprietorships, and self-employed individuals. It is also available to employers regardless of size or industry, though there are certain restrictions depending on the type of employer.
Advantages of the Employee Retention Credit
The employee retention credit offers a number of advantages to employers including:
- A refundable tax credit that can be claimed against existing federal employment liabilities.
- Higher wage limits than other programs like the Paycheck Protection Program (PPP) which only covers up to $10,000 of wages per quarter.
- No requirement to use the funds for specific purposes like PPP loans.
- No need to lay off employees to receive the credit.
How to Claim the Employee Retention Credit
To claim the employee retention credit, employers must file Form 941 with the IRS. Employers must also fill out Schedule R to report the amount of the credit. Once the form is completed, employers can claim their credit when they file their quarterly taxes.
The employee retention credit is a valuable tool for businesses struggling to keep their employees during these difficult times. While there are some restrictions and caveats associated with the credit, it offers employers an opportunity to retain employees while still being able to claim a refundable tax credit. For many businesses, the ERC could end up making the difference between staying afloat or going under in 2021.